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June

In his (PDF 14k) Charles Lee, chairman of Hong Kong Exchanges and Clearing Ltd., gave a strong endorsement to the global use of International Financial Reporting Standards.

He noted that 36% of the turnover of the Hong Kong exchange is generated by international investors who are best served by a uniform global accounting language. An excerpt from Mr. Lee's comments:

Hong Kong has been a firm supporter of a universal accounting regime, and has participated fully in the work of the IASB. Hong Kong financial reporting standards issued by the Hong Kong Institute of Certified Public Accountants have been fully converged with the International Accounting Standards now known as International Financial Reporting Standards since 1 January 2005. This convergence in many instances requires a change in the accounting policy of listed companies, and has led in some cases to unexpected results....

The financial results of Hong Kong listed companies and the accounting language they use must be easily understood by investors and analysts around the globe, as well as those based in Hong Kong. A uniform accounting platform allows for the comparison of companies and their results in different jurisdictions and leads to greater confidence in the quality and value of our stocks.

The European Financial Reporting Advisory Group has Recommended (PDF 18k) to the European Commission that the amendments to the Amendments to IAS 39 relating to cash flow hedge accounting of forecast intragroup transactions be endorsed for use in Europe.

EFRAG has also written to IFRIC supporting the proposal in IFRIC D15Reassessment of Embedded Derivatives but with some suggestions for change.

The IASB met at its offices in London on Wednesday and Thursday, 22-23 June 2005. We have combined the preliminary and unofficial notes taken by Deloitte observers at the meeting in a Separate Web Page.
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The IASB met at its offices in London on Wednesday and Thursday, 22-23 June 2005. We have combined the preliminary and unofficial notes taken by Deloitte observers at the meeting in a Separate Web Page.

On 20 June 2005, at the United States-European Union summit meeting in Washington, the US and the EU jointly announced a series of undertakings designed to implement the Declaration on Enhancing Transatlantic Economic Integration and Growth.

One of the undertakings is "promoting convergence of accounting standards as soon as possible". Click to download:

The Trustees of the IASC Foundation met in Paris on 21 June 2005. Presented below are the preliminary and unofficial notes taken by Deloitte observers at the meeting.

Since much of the discussion was based on papers that were not made available to observers at the meeting, the information contained within should not be relied on.

IASC Foundation Trustees' Meeting21 June 2005, Paris

Approval of the March 2005 Minutes and Introductory Remarks

The March 2005 meeting minutes were approved without any additional comments from the Trustees.

Joint Meeting with IASB

Consideration of specific topics on IASB's agenda and work programme and convergence

IASB Chairman, Sir David Tweedie, opened by noting that the Board's main objective through the end of 2004 was preparing a stable platform of IFRSs for 2005 and starting in 2005 the main objective is global convergence.

Stable platform

Sir David reviewed the main stable platform projects – the Improvements Project completed in December 2003 and IFRSs 2 through 6 issued in 2004. He noted that in 2005 only one new standard is foreseen: IFRS 7 Financial Instruments: Disclosures. That standard will be effective as of 2007, but earlier application will be allowed.

With regard to the European 'IAS 39 carve-out', the IASB last week issued an amendment to IAS 39 Financial Instruments: Recognition and Measurement modifying the fair value option so as to allow the standard to be fully endorsed in Europe. EFRAG has recommended that the European Commission approve the amendment. As for the second 'carved-out' item, hedge accounting for core deposits, the issue is not currently included on the IASB's agenda.

Convergence and Work Programme

The IASB Chairman explained that the current approach to convergence is not to try to reconcile differences but rather to involve several parties in new projects. He cited several examples:

Canada: Canada is committed to replacing Canadian GAAP with IFRSs in three to four years,

Japan: Discussions concerning their conceptual framework have taken place, revealing no major differences in principle but some differences in specific areas such as inventories, segment reporting, consolidation, and the revaluation model available for assets. Sir David said that convergence in Japan has a three-year target for completing a first phase. A second phase will subsequently be discussed. It is not presently known how many years exactly it will take to achieve full convergence.

China: China has requested a visit from the convergence team in order to start discussions about how equivalence may be achieved.

Europe: Comments were made about the difficulty of discussing the topic of convergence in Europe (compared to discussions with Japan, USA, and Canada) because views are diverse and there is no one identified consulting party to discuss with.

United States: With respect to convergence between IFRS and US GAAP, the goal is that sufficient work be completed or in progress by 2007 or early 2008 so that the SEC will be in a position to remove the requirement for IFRS issuers to reconcile to US GAAP. However, before making that decision, in addition to convergence, the SEC will look at the consistent application, enforcement, and audits of IFRS statements.
With the objective of IFRS-US GAAP convergence in mind, the IASB Chairman pointed out that the priorities to be resolved before 2007 are Business Combinations - Phase II, Performance Reporting - Segment A, and Income Taxes. Progress would need to be made on the following projects but would probably not be finished by 2007-2008:

Liabilities and Equity

Financial Instruments: Derecognition and Securitisation

Performance Reporting - Segment B

Revenue and Liabilities

Consolidation and SPEs.

Two additional issues will be given attention, Leases and Employee Benefits, the latter in particular due to the large number of transfers of corporate pension plans to the US Pension Benefit Guaranty Corporation. Those issues are likely to be placed on the agendas of the IASB and FASB within the year.
There remain a number of other convergence issues to be considered by the IASB and the FASB, namely:

IASB

Joint Ventures (two options are currently allowed in IAS 31)

Capitalisation of Borrowing Costs

Government Grants

Segment Reporting
FASB

Capitalisation of Development Costs

Revaluation Model Option for Property, Plant, and Equipment and for Intangibles

Fair Value Measurement Option for Investment Properties

Those issues are either already on the agendas of the Boards or are perceived to be 'easily remedied' and hence should be resolved within two to three years.

Lastly, comments were made that the FASB is also completing work on guidance on how to measure fair value (not when to apply it, only how to measure it once the decision has been taken to use it as a measurement basis) that the IASB may take into consideration. In addition, the IASB is looking at an amendment to IAS 38 Intangible Assets following the publication of and negative reactions in Europe to IFRIC 3 Emission Rights.

Additional comments raised

Trustees raised the following points:

They questioned the extent to which the IASB is going to be involved in the interpretive process of regulators, particularly the SEC. The IASB Chairman indicated that they explained to the SEC that, as IFRSs are principle-based standards, they should accept the exercise of judgement in the application of those standards. A paper should be prepared and presented to the SEC and the PCAOB explaining how this will work. It was also mentioned that there are discussions between the IASB and the SEC staff, but the issues raised thus far are mainly ones of obvious non-compliance.

The manner in which IASs and IFRSs are written sometimes makes them inaccessible to 'ordinary users', that is, accounting and industry professionals who have not been trained in IFRSs. The IASB Chairman and one IASB member indicated that they were aware of the issue and working on it. For instance, efforts have been made with the latest amendment to the fair value option to make it more workable, and particular attention has been paid to the wording of the coming exposure draft on Business Combinations - Phase II in order to make it simpler.

It would be appropriate for Trustees to receive more information about the context for identifying priorities in determining the IASB's agenda to enable them to assess how constituent needs have been considered.

Conceptual Framework

IASB Member James Leisenring made a presentation to the Trustees on conceptual frameworks. He reminded that the objective of financial reporting is to provide information useful information to investors, creditors, and other non-management outsiders. In response to a Trustee's question, he indicated that this information may sometimes differ from management information.

Mr. Leisenring highlighted the areas most often the subject of controversy: inability to agree on what should be profit or loss, measurement, timing of recognition, uncontrolled volatility, and display of items in profit or loss. He also illustrated the differences in the definitions of assets, liabilities, income, and expenses under the IASB and FASB Frameworks. Mr. Leisenring explained that the current IASB Framework is a 'balance sheet approach' under which revenue, expenses, gains, and losses are defined by reference to assets and liabilities, as well as the importance placed on the Framework in the IFRS hierarchy.

He concluded by discussing why the Framework is essential:

To resolve accounting debates in a consistent manner

To defend the accounting standard-setting process as being in fact neutral

To achieve principle-based standards

Alternatives/ suggested would not work such as those that call for consensus, compromises, or consideration of consequences of the approach.

It was explained that the current IASB-FASB Framework project will focus on providing more robust definitions of elements to be recognised in the financial statements and that this project was part of a request for convergence of frameworks around the world.

The reactions of the Trustees after the presentation were varied, many requesting clarification on the technical consequences of the views presented.

Performance Reporting

The aim of the Performance Reporting project is to:

Define a common financial performance reporting package; and

Improve the decision-relevance of information required – notably by matching the package to market analysts', investors', and managers' needs.

The project is being addressed simultaneously by the IASB and FASB as a result of urgent user demands. Both boards have acknowledged the need to segregate the financing element included in the performance reporting package.

The project consists of two distinct phases:

Segment A (Exposure Draft to be published directly): The aim is to create a short-term converged package, for which one proposal would be to have a single statement presenting both earnings and comprehensive income.

Segment B (Discussion Paper to be published in 2006): Segment B will be a long-term project dealing with a major overhaul of the reporting package and the presentation of items in the components of financial statements.

A number of Trustees commented that Segment A proposals may bring about more fundamental changes than expected, in particular what non-sophisticated users perceive as being 'the bottom line' of the income statement. They questioned whether the timing of the project (including the choice to release an Exposure Draft on Segment A) was appropriate due to expected controversy in many parts of the world. It was ultimately concluded that it is the responsibility of the IASB to determine the timetable for this project but that they should be aware of the concerns expressed by the Trustees.

Other decisions in Segment A that received no specific comments were:

Full set of financial statement = 1 year.

Beginning- and end-of-period statements of financial position.

Every statement shown with equal prominence.

Comparative information for one year.

EPS required on face of income statement only for net income.

Approval of the Constitution Review Report

Before voting on the Constitution Review Report, the Trustees discussed a proposal by the IASC Foundation Chairman, Paul Volcker, to establish a high-level advisory group that would be consulted during the process of nominating new Trustees and considering renewals. The group would be consultative only and Trustees would take the ultimate decisions regarding appointments. The Trustees were in favour of setting up such an advisory group. It was explained that this proposal would address certain concerns expressed in Europe and add a breadth of views to the selection process.

It was contemplated whether the terms of reference for such a group should be formalised for inclusion in the revised Constitution. The Trustees decided unanimously that this should not be done, to allow flexibility. It could be incorporated as an amendment in the future, after assessment of this consultative process. It was noted that nine Trustee positions are up for renewal this year.

The revised Constitution was duly voted in with 1 July 2005 as effective date. It was agreed that the three additional Trustees (as required by the revised Constitution) would be appointed at year-end together with those replacements necessary when the existing Trustees' terms ended.

The European Financial Reporting Advisory Group has Recommended (PDF 18k) to the European Commission that the amendments to the IAS 39 fair value option that the IASB issued last week be endorsed for use in Europe.

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